Saving for a Rainy Day

Apart from your regular savings you should also consider putting aside some money for the proverbial rainy day. Life can take unexpected turns at any time which is why it is important to put aside some money in case of an emergency. However secure your job may be or even if you have never been sick a day in your life, you never can really predict what may happen to your job, family, or health so it is financially smart to always be prepared. Even a simple breakdown or malfunction in a major electrical appliance can throw your budget out of gear if you do not have an emergency fund to fall back upon.

Establishing the Emergency Fund

While setting up your emergency fund, two commonly asked questions are:

• How much to save?
• Where to invest?

The size of your emergency fund

It is hard to put a dollar limit on your emergency fund or specify the exact amount you need to set aside there. Different people have different needs and expenses and a ‘one size fits all' approach cannot be adopted while recommending the size of your emergency fund. Instead a good rule of thumb is to set aside enough money to cover at least four months of living expenses if you are holding down a steady job. If you are self employed, at least six months of living expenses should be put aside. Most people may argue that three months expenses are a good enough sum to put aside. However remember that the size of your emergency fund should be big enough to cover most of the unexpected expenses or situations you are likely to run into from time to time. So if you lose or decide to quit your job you don't need to hit the panic button about your next job or take the first offer that comes your way. You have more than enough time to evaluate your options and choose wisely.

How to invest your money in the emergency fund

A rainy day fund or an emergency fund should be kept separate from your other savings accounts. Make sure that you only touch the money when absolutely necessary. Since you are not in a position to predict when you are likely to require the money, the funds should be accessible at any time. Do not invest the money in CDs or other similar investment options which do not allow you access to the money before a specified time period.

Ideally money in the emergency fund should be kept in savings accounts such as a money market account which allows you to withdraw the money whenever required.

If you don't have enough money to set up a full fledged emergency fund, you can start small instead. It may be difficult to immediately come up with three to six months of living expenses all at once. What you can do is save a little every month until you have the required amount. It is best to fund your emergency account before any of your other savings accounts.